Starbucks And The Third Place

After Starbucks recent second quarter 2024 earnings call, founder and past three-time CEO Howard Schultz posted comments about his hand-picked successor’s strategy. Mr. Schultz reacted to statements made to analysts by Starbucks’ CEO, Laxman Narasimhan and CFO, Rachel Ruggeri, where both executives described Starbucks’ “underperformance.” Mr. Narasimhan and Ms. Ruggeri also handled analyst questions with an abruptness that seemed to leave a lot unsaid. Both Mr. Narasimhan and Ms. Ruggeri stated, however, that Starbucks is a great brand with enormous opportunity ahead. The comments sounded hollow as Starbucks is already a great brand with enormous opportunity, but only if properly managed.

The press picked up on Howard Schultz’ very public concerns. Mr. Schulz was quite clear: Starbucks’ problems are not the weather and not “headwinds.” Mr. Schultz sees Starbucks’ problems stemming from a loss of focus on the US stores. There was some concern on the part of analysts as well. As one analyst said when questioning the quarterly performance and Starbucks’ C-suite responses:

“I guess, you know, I’m trying to think through the sequencing of how we got here today, and it seems like in October, and early November, at the Analyst Meeting demand was not a problem in the U.S.

“And, I hear you saying that you have a lot of unmet demand. But could you, excuse me, kind of help us do a hindsight on how these issues have come to a crux, so quickly just four or five months hence since those kind of very ambitious goals that were given?

Mr. Schultz wants Starbucks to remain the customer’s Third Place. Mr. Schultz understands that Starbucks Third Place between home and work, its “café society” positioning, has evolved due to technology and changed customer behaviors. But, the Third Place experiential context is still important and compelling. In a world where customers want and where brands create experiences, why are Starbucks executives seemingly not focusing on the Starbucks experience?

Mr. Schultz worries that Mr. Narasimhan’s executive team is more focused on transactional issues than experiential issues. And, judging from the earnings call transcript, there is a sense that how a person purchases Starbucks is front and center. The earnings call did not highlight what actually makes Starbuck’s so compelling and what can continue to keep Starbucks growing and profitable in the experiential role that it originated.

In his third stint as CEO, Howard Schultz provided a roadmap, a vision of a “reimagined” Starbucks Third Place. Mr. Schultz recognized that how we live changed over the past 35 years of Starbucks history. But, he also understood that the emotional and social rewards delivered by Starbucks were, and still are, critical human needs: the need to belong and the need to be uniquely independent.

We all need to belong. We want to belong to something bigger than ourselves: a community, a network, a business, a family, a cause, a union, a nation, a neighborhood or a place. Belonging requires connecting. Connections are part of the Starbucks experience. 

At the same time, we want to be ourselves. We want to be individuals. We want to be seen and respected as individuals with special characteristics. We want to be independent and unique. 

Starbucks offers both: belong to a community, a place and individualize your beverage. Be unique like all of your friends.

Social behavior research suggests that both independence and belonging are essential for finding and securing our place in life.  And, sociologists, psychologists, behaviorists and those who study culture speak of the power of the independent self and the interdependent self and the ways in which these interact. The personal self and the social self “mutually reinforce each other.”

Technology may have enhanced and altered how we behave independently and interdependently, but technology has not changed our driving human needs. The need for a place where we can be both individual and inclusive still remains.  Starbucks’ café society experience satisfied our desire to be part of something, to connect while allowing us to be individuals.

In his post, Mr. Schultz suggested that focusing on the channels of how we receive our Starbucks is important but channels are all about the way in which we deliver a brand promise. Starbucks needs to work on making the third place experience contemporary.

In September 2022, Starbucks offered this vision for the brand:

“Fast forward 35 years, and as the world has evolved, so has the Third Place. Starbucks stores are serving more people each day than ever, with customers often ordering on their phones instead of at the counter. The menu has grown from just a handful of drinks to dozens, with stores built for mostly hot beverages straining to meet the demand for more customized drinks and cold beverages. And food is an increasingly important part of the mix – what was once a case of mostly breakfast pastries case is now a food platform that includes warmed sandwiches, available all day long.

“As Starbucks is reinventing the company, it is also reimagining the Third Place – keeping coffee and connection at the center.”

Additionally, Starbucks stated:

Today, we find ourselves at another unique moment; a moment that challenges us to reinvent and think differently,” said John Culver, group president, North America and chief operating officer. “Our partners have come to expect more from us. Our customers have come to expect more from us.  And it is clear our physical stores must modernize to meet this moment.”

Starbucks described its brand essence as “delivering experiential convenience, in a way only Starbucks can.” To do this, Starbucks needs to make it easier to work there and easier for its employees to connect with customers and vice versa.

Mr. Schultz provided a strategic map. There were three must-do’s: 1) purpose-built store design, 2) coffee and craft, and 3) elevating experiential convenience. 

All three of these must-do’s focused on keeping Starbucks’ Third Place experience contemporary. 

Purpose-Built Design would “’reimagine our store experience for greater connection, ease and a planet positive impact.’ Starbucks purpose-built store design approach would modernize physical stores to serve the increasing demand while creating an environment that is inclusive and accessible, through the lens of sustainability. To help drive innovation, Starbucks has turned to the team of R&D experts and baristas working side-by-side in Starbucks Tryer Center, to help streamline the work behind the counter, and enable more time for genuine human connection.”

Coffee and Craft would “reimagine the coffee experience with breakthrough beverage innovation that elevates coffee craft and quality. Whether the coffee is hot or cold – Starbucks is turning to proprietary, patented technology invented in-house, like the new Clover Vertica™, which offers every customer a freshly brewed cup of coffee in just 30 seconds. Coffee is at the center of who we are and remains on the forefront of anticipating what customers love and our partners are proud to deliver.”

Elevating Experiential Convenience would focus on the total brand experience. “The Third Place has never been defined solely by a physical space, it’s also the feeling of warmth, connection, a sense of belonging Starbucks. Digital technology is helping augment and extend that feeling of connection with customers – whether they are in Starbucks stores, in their cars, on their doorsteps.

“One way Starbucks is doing this is through Mobile Order on the Starbucks app. Starbucks is enhancing Mobile Order to make it easier for customers to order, anticipate when their order will be ready, and make it easier and more efficient for partners to serve mobile order customers, eliminating some of the stress at peak times. Mobile ordering is also being extended to more licensed locations at airports and grocery stores.

“The company also unveiled Starbucks Odyssey, a new experience powered by Web3 technology that will foster connection and unlock access to new experiential benefits and immersive coffee experiences for Starbucks® Rewards members and partners in the U.S. Starbucks is one of the first companies to integrate Web3 technology with an industry-leading loyalty program at scale, while creating a community online that will enable new ways for Starbucks to engage with its members and its partners. As of Monday, customers and partners are now able to join the waitlist for a chance to be among the first to receive access to the Starbucks Odyssey experience, which will launch later this year.” “We have a heritage of continuously adapting how we serve customers, anticipating where they are going and innovating to take them there. Connection is who Starbucks has always been.’”

Nothing happens until it happens at retail. 

Very few people are like Howard Schultz who deeply understand this idea. Place is more than a space. Place is more than its operations. Place is more than its offerings.

Years and years ago, with the Surgeon General’s report on cigarettes, Philip Morris decided to forgo the emphasis on the “smoke” of Marlboro and, rather, evoke a place. The place was Marlboro Country. Marlboro Country spoke to all Marlboro’s benefits and rewards. Philip Morris did the same with Miller Beer. Miller Beer created Miller Time, that special time and place after a hard day’s work.

The wonderful southern writer, Eudora Welty, believed place was the anchor when crafting a story. She understood how the powerful description of place grounded a story. She wrote,

“Place has a more lasting identity than we have, and we unswervingly tend to attach ourselves to identity. Experience has ever advised us to base validity on point of origin. Place … is the named, identified, concrete, exact, and exacting, and therefore credible, gathering spot of all that has been felt, is about to be experienced. Location pertains to feeling; feeling profoundly pertains to place; place in history partakes of feeling, as feeling about history partakes of place. Place is seen in a frame. Not an empty frame, a brimming one. Point of view is a sort of burning-glass, a product of personal experience and time; it is burnished with feelings and sensibilities, charged from moment to moment with sun-points of imagination.”

True of writing and true of retail. Place has power. Mr. Schultz loves the Starbucks “place.” He is committed to Starbucks thriving as a Third Place. Of course, he sees the financial issues and the shopping issues that are troubling Starbucks. But, he also knows that fixing the place which drives the total brand experience, making the brand place beloved, is task number one. Place is the face of your brand.

Mr. Schultz’ concern is that the current management focus is only on the sale and not the sensibilities. There is also a heavy focus on attracting new customers. The problem is that core customers, new customers, occasional customers will become increasingly transactional if the place loses its relevance and its differentiation.

As Mr. Schultz wrote, what is missing is a “maniacal focus on the customer experience.” And, he pointed out that data are OK, but “The answer does not lie in the data, but in the stores.” Falling under the spell of data allows management to put the onus on measurement. Further, Mr. Schultz reiterated his 2022 strategy that galvanized the brand around the total brand experience. “Through it all, focus on being experiential, not transactional.” 

Current management has the opportunity to increase Starbucks‘ brand value by enhancing the Starbucks brand experience relative to the customer-perceived costs of money, time and effort. And, by building trust. Letting the third place become no place would be tragedy.